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Chapter 7
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Chapter 7Internal Control and Cash
After studying Chapter 7, you should be able to:
Identify the principles of internal control.Explain the application of internal control to cash
receipts.Explain the application of internal control to cash
disbursements.Prepare a bank reconciliation.Explain the reporting of cash.Discuss the basic principles of cash management. Identify the primary elements of a cash budget.
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Internal Control consists of... all the related methods and measures adopted
within a business to: safeguard its assets from:
Employee theftRobberyUnauthorized Use
enhance accuracy and reliability of its accounting records by reducing:Risk of ErrorsIrregularities
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Establishment of Responsibility
Control is most effective when only one person is responsible for a given task.
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Segregation of Duties
•Responsibility for related activities should be assigned to different individuals•Responsibility for record keeping for an asset should be separate from the physical custody of the asset
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Documentation
Provide evidence that transactions and events occurred: Shipping documents Sales invoices
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Documentation Procedures
Documents should be pre-numbered.All documents should be accounted
for. Sources documents should be
promptly forwarded to accounting department.
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Physical, Mechanical and Electronic Controls
OR FINGERPRINT,
EYEBALL Scan
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Independent Internal Verification
Involves review, comparison, and reconciliation of data prepared by employees•Verification should be made periodically or on surprise basis•Verification should be done by employee who is independent of the personnel responsible for the information•Discrepancies and exceptions should be reported to management
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Independent Internal Verification
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Other Controls
Bonding of employees who handle cash
Rotating employee’s duties and requiring employees to take vacations
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Limitations of Internal Controls
Cost/Benefit - cost of establishing procedure should not exceed expected benefit
Human element - fatigue, carelessness, indifference
Collusion - two or more individuals who work together to get around controls
Size of business
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Cash consists of...
coinscurrencychecksmoney ordersmoney on handdeposits in bank
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Cash is the most desirable asset...
because it is readily convertible into any other asset.
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Page 297 in book
Internal Control Over Cash Receipts
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Internal Control Over Cash Disbursements
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Electronic Funds Transfer (EFT)
An approach to transfer funds among parties without paper (deposit tickets, checks, etc.)
EFT uses wire, telephone, telegraph or computer to transfer from one location to another.
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Petty Cash Fund
is a cash fund used to pay relatively small amounts
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Use of a Bank...
is good internal control.minimizes the amount of cash that must be kept
on hand.provides a double record of all bank transactions
one by the business one by the bank
helps a company safeguard its cash by using a bank as a depository and clearinghouse for checks received and written.
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Bank Statement shows•check & other debits•deposits & other credits•daily cash balance
Bank Statement -a copy of the
bank’s records sent
to the customer for
periodic review.
Apri l 30, 2004
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Company Balance and Bank Balance of Cash Usually Differ Because...
Time lags that prevent one of the parties from recording the transaction in the same period. Days pass between the time a check is written
and dated and date it is paid by the bank. A day may pass between the time receipts are
recorded by the company and the time they are recorded by the bank.
A time lag may occur when the bank mails a debit or credit memo to the company.
Errors by either party in recording transactions.
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Reconciliation Procedure
reconcile balance per books and balance per bank to their adjusted or correct balances.
the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.
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TermsDeposits in transit - deposits recorded by the
depositor that have not yet been recorded by the bank.
Outstanding checks - checks issued and recorded by the company that have not yet been paid by the bank.
NSF check - a check that is not paid by the bank because of insufficient funds in the customer’s bank account.
Adjusted balance - same as true cash balance, correct cash balance
Bank ReconciliationProcedures
$ Per Bank Statement-outstanding checks+deposits+/- bank errorscorrect cash amount
$ Per Books-NSF Checks-check printing or other service charge+notes collected by bank correct cash amount
W.A. Laird CompanyBank Reconciliation
April 30, 2004Cash balance per bank statement 15,907.45Add: Deposits in transit 2,201.40
18,108.85Less: Outstanding checks
No. 453 3,000.00No. 457 1,401.30No. 460 1,502.70 5,904.00
Adjusted cash balance per bank 12,204.85
Cash balance per books 11,589.45Add: Collection of N/R for $ 1,000 plus interest earned $50, less collection fee $ 15 1,035.00
Error on recording check No. 443 36.00 1,071.00
12,660.45
Less: NSF check 425.60
Bank service charge 30.00 455.60
Adjusted cash balance per bank 12,204.85
Illustration 7-9
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Each reconciling item in determining the adjusted balance per books must be journalized and posted.
For Cash To Show the Correct Balance
W.A. Laird CompanyBank Reconciliation
April 30, 2004Cash balance per bank statement 15,907.45Add: Deposits in transit 2,201.40
18,108.85Less: Outstanding checks
No. 453 3,000.00No. 457 1,401.30No. 460 1,502.70 5,904.00
Adjusted cash balance per bank 12,204.85
Cash balance per books 11,589.45Add: Collection of N/R for $ 1,000 plus interest earned $50, less collection fee $ 15 1,035.00
Error on recording check No. 443 36.00 1,071.00
12,660.45
Less: NSF check 425.60
Bank service charge 30.00 455.60
Adjusted cash balance per bank 12,204.85
Illustration 7-9
Apr 30 Cash 1,035.00Miscellaneous Expense 15.00
Notes Receivable 1,000.00
Interest Revenue 50.00Apr 30 Cash 36.00
Accounts Payable 36.00Apr 30 Accounts Receivable-Baron 425.60
Cash 425.60Apr 30 Miscellaneous Expense 30.00
Cash 30.00
JOURNAL
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Reporting Cash
Cash is recorded in both the balance sheet and the statement of cash flows.
The balance sheet shows the amount of cash available at a given point in time.
The statement of cash flows shows the sources and uses of cash during a period of time.
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Cash EquivalentsReadily convertible to known amount
of cashSo near maturity that their market
value is relatively insensitive to changes in interest rates
Examples: Treasury bills Commercial paper Money market funds
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Restricted Cash...Is cash that is not
available for general use.
Is set aside for special purpose.
If not to be used within next year, report as noncurrent asset.
Operating Cycle of a Merchandising Company…is the average time it takes to
go from cash to cash in producing revenues.
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Principles of Cash Management
Increase the speed of collection on receivables.
Keep inventory levels low.Delay payment of liabilities.Plan the timing of major expenditures.Invest idle cash.
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Reporting Cash
Cash on hand, cash in banks, and petty cash are often combined and reported as cash.
Cash is the most liquid asset and listed first in the current asset section of the balance sheet.
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Cash Budget
Cash is vital. Planning the company's
cash needs is a key business activity.
Cash budget shows the anticipated cash flows, over a 1 to 22-year period.
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Cash Budget
The cash budget contains :Cash receipts section;Cash disbursements section;Financing section.
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Cash Receipts Section
includes expected receipts from the company's principal source(s) of revenue, such as cash sales and collections from customers on credit sales
also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company's capital stock
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Cash Disbursements Section
shows expected payments for direct materials, direct labor, manufacturing overhead, and selling and administrative expenses
includes projected payments for income taxes, dividends, investments, and plant assets
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Financing Section shows...
expected borrowingsthe repayment of the
borrowings and interest
